Several years ago I was helping a buyer purchase his first home. We made an offer on the house, we moved through the contingencies in the contract, and everything was going well until the appraisal came in. And it was low.
If I remember right, I think it was $1500 short. Not a whole lot of money when you’re talking about a few hundred thousand dollars, but for a buyer and seller, it's pretty significant.
Most of the buyers I work with hope to get an appraisal above the price they agreed to pay for the house, but if it comes in a little low they’re not too upset. It means they get to borrow less money and still get the house.
This buyer, however, wanted out of the deal when he found out the appraised value of the house had not been as high as the price he agreed to pay for the house.
Hmmmm.
Paragraph 10 in the South Carolina real estate contract covers appraisals. Most people understand that paragraph to mean that if the contract is contingent on an appraisal, and the house doesn’t appraise for at least as much as the sales price, the buyer doesn’t have to buy the house. This gives buyers a sense of security. HOWEVER, the control is really in the seller’s hands. The paragraph also says that if the appraisal comes in low, the seller has the option to drop the sales price to meet the appraised value. If the seller drops the price, the buyer is obligated to move forward with the purchase. If the seller doesn’t drop the price, the buyer can either make up the difference between the appraised value and purchase price, or terminate the contract.
But the important thing to note is that the seller can keep the deal going without a whole lot of participation from the buyer. My buyer didn’t want to move forward, but since the seller dropped the sales price to match the appraisal, he had to.
There’s a similar situation during the inspection period, where the buyer is in control… Click here to read more about that.